Producer price inflation, UK: February 2020

• The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020.

• The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

• Petroleum products made the largest downward contribution to the change in the annual rate of output inflation.

• Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

• The Office for National Statistics has released a public statement on COVID-19 and the production of statistics. Specific queries must be directed to the Media Relations Office.

We are carrying out a survey to find out more about our users’ views on the producer price inflation bulletin. Your answers to this survey – which should take less than five minutes to complete – would be invaluable. The survey will close at the end of March 2020.

The Office for National Statistics (ONS) will be implementing important methodological improvements to the Producer Price Index (PPI) and Services Producer Price Index (SPPI) by summer 2020. These include moving from fixed-base weights to annual chain-linking, which will improve the accuracy of these statistics. At the same time, we will be introducing changes to the level of detail of the data we publish and changes to our producer price inflation headline figure from net to gross in line with international best practice. To support users with the transition to the new headline definition, Section 6 includes a comparison between the existing measures of output and input producer price inflation on a net and gross basis.

We will pre-announce the exact date when these changes will be implemented over the coming few months to give users as much notice as possible.

The factory gate price (output price) is the amount received by UK producers for the goods that they sell to the domestic market. It includes the margin that businesses make on goods, in addition to costs such as labour, raw materials and energy as well as interest on loans, site or building maintenance, and rent.

The input price measures the price of materials and fuels bought by UK manufacturers for processing. It includes materials and fuels that are both imported or sourced in the domestic market. It is not limited to materials used in the final product, but it includes what is required by businesses in their normal day-to-day running, such as fuels.

The use of core input inflation removes the more volatile indices of food, tobacco, beverages and petrol from our statistics.

Index numbers shown in the main text of this bulletin are on a net sector basis. The index for any industry relates only to transactions between that industry and other industries; sales and purchases within industries are excluded.

Indices relate to average prices for a month. The full effect of a price change occurring part way through any month will only be reflected in the following month’s index.

All index numbers exclude Value Added Tax (VAT). The Soft Drinks Industry Levy (SDIL), introduced in April 2018, is also excluded. Excise Duty (on cigarettes, manufactured tobacco, alcoholic liquor and petroleum products) is included, except where labelled otherwise.

Each PPI has two unique identifiers: a 10-digit index number, which relates to the Standard Industrial Classification 2007 (SIC 2007) code appropriate to the index, and a four-character alpha-numeric code (series ID), which can be used to find series when using the time series dataset for producer price inflation.

Figures for the latest two months are provisional, and the latest five months are subject to revisions taking account of late and revised respondent data. Revisions to seasonal adjustment factors are re-estimated every month for the seasonally adjusted series. A routine seasonal adjustment review is normally conducted in the autumn each year.

Figure 1 shows input and output Producer Price Indices (PPIs) over the past 15 years. Input producer price inflation is driven mostly by commodity prices, which tend to be more volatile over time, compared with prices for finished goods (output producer price inflation). Input producer price inflation is also sensitive to exchange rate movements, as roughly two-thirds of inputs into the UK manufacturing sector are imported.

The annual rate of inflation for goods leaving the factory gate (output prices) slowed to 0.4% in February 2020, from 1.0% in January 2020 (Table 1). The annual rate has now remained positive for 44 consecutive months, last showing negative growth in June 2016.

On the month, the rate of output inflation was negative 0.3% in February 2020, down from 0.2% in January 2020 and the lowest the rate has been since December 2018.

Figure 2 shows contributions by product group to the monthly and annual rate of output inflation, and Table 2 shows monthly and annual growth rates by product group.

Of the 10 product groups, 7 provided positive contributions to the output annual rate.

Transport equipment provided the largest upward contribution, of 0.12 percentage points, to the annual rate (Figure 2), with price growth of 1.3% on the year to February 2020 (Table 2). The annual rate for this product group has remained positive for 50 consecutive months.

Food products displayed the second-largest upward contribution, of 0.11 percentage points, to the annual rate, with annual growth of 0.9% in February 2020.

Of the three product groups that provided a negative contribution to the annual rate, chemicals and pharmaceuticals provided the largest negative contribution, at 0.11 percentage points. The annual rate for chemicals and pharmaceuticals fell by 1.8% on the year to February 2020; this remains unchanged from January 2020. This industry has provided a negative contribution to the annual rate for the last eight months, following 36 consecutive months of positive annual growth.

On the month, output inflation was negative 0.3%. Four product groups displayed downward contributions, with petroleum products showing the largest downward contribution, at negative 0.30 percentage points. Chemicals and pharmaceuticals provided the second-largest downward contribution, at negative 0.07 percentage points.

Figure 3 shows contributions to the change in the annual rate for factory gate prices (output prices).

There was a 0.6 percentage point decrease in the annual rate for output prices, from 1.0% in January 2020 to 0.4% in February 2020. Of the 10 product groups, 6 displayed downward contributions to the change in the rate, with petroleum products providing the largest downward contribution, at negative 0.47 percentage points (Figure 3). The annual rate of petroleum products was negative 0.9% in February 2020, down from 4.0% in January 2020. Petroleum products also fell by 3.5% between January 2020 and February 2020, compared with being up by 1.3% between January 2019 and February 2019.

Computer, electrical and optical provided the second largest negative contribution to the change in the rate, at negative 0.13 percentage points. There were further smaller negative contributions coming from other manufactured products; paper and printing; tobacco and alcohol (including duty); and metal, machinery and equipment.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell by 0.5% in February 2020, down from 1.6% in January 2020.

The monthly rate for materials and fuels purchased was negative 1.2% in February 2020, down from 0.3% in January 2020. This is the lowest the rate has been since December 2018.

The annual rate of inflation for imported materials and fuels was negative 0.4% in February 2020 (Table 4), which is down 1.9 percentage points from January 2020 when it was 1.5%. The monthly rate was negative 1.3% in February 2020, down from 0.7% in January 2020. Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight.

The Sterling effective exchange rate index (ERI) rose by 0.4% on the month in February 2020. On the year, the ERI displayed growth of 2.4% in February 2020, down from 3.3% in January 2020. The annual rate of growth has now remained positive for four consecutive months following a period of five consecutive months of negative annual growth.

All else being equal, a stronger Sterling effective exchange rate will lead to less expensive inputs of imported materials and fuels.

Figure 4 shows contributions by product group to the monthly and annual rate of input inflation, and Table 5 shows monthly and annual growth rates by product group.

Of the nine product groups, four provided negative contributions to the input annual rate.

The largest downward contribution to the annual rate came from crude oil, which contributed 1.27 percentage points (Figure 4) and had negative annual price growth of 8.7% (Table 5).

Imported chemicals provided the second-largest downward contribution to the annual rate, at 0.76 percentage points, with negative price growth of 6.7%. This was driven by imported products used in the manufacture of petrochemicals, which fell by 9.6% on the year. The annual rate for this product group has remained negative for 13 consecutive months.

The largest upward contribution to the annual rate came from imported metals, with a contribution of 1.49 percentage points and positive price growth of 20.6%. This was caused by imported precious metals from non-EU countries, which rose by 73.9% on the year; this is the highest the rate has been since records began. The annual rate for this product group has remained positive for 44 consecutive months.

Crude oil provided the largest downward contribution, of 1.81 percentage points, to the monthly rate of input inflation, with crude oil prices falling by 10.5% on the month. Imported metals provided the largest upward contribution, of 0.60 percentage points, as prices were up by 6.2% between January 2020 and February 2020.

Figure 5 shows contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices).

The annual rate for input prices fell by 2.1 percentage points in February 2020, from 1.6% in January 2020 to negative 0.5% in February 2020 .

Crude oil provided the largest downward contribution to the change in the rate, at 2.79 percentage points. The annual rate of crude oil fell by 17.8 percentage points, from 9.1% in January 2020 to negative 8.7% in February 2020. On the month, crude oil fell by 10.5%, compared with an increase of 7.0% between January 2019 and February 2019. This base year effect has caused the downward contribution to the change in the rate from crude oil.

Imported metals provided the largest upward contribution to the change in the rate, at 0.41 percentage points.

Producer price indices (PPIs) are measured on two different bases: gross and net of inter-sector sales. Gross sector PPIs include products sold by one business to another business classified to the same industry sector. Net sector PPIs exclude (net out) products sold by a business to another business classified to the same industry sector. The Office for National Statistics (ONS) currently headlines with net sector PPIs, which include duty. We will move our headline to a gross sector basis excluding duty by summer 2020, in line with international best practice.

Figure 6 shows net and gross output PPIs over the past 10 years. In February 2020, the net output PPI was 115.6 while the gross output excluding duty PPI was 116.1.

Gross and net sector output PPIs display similar trends over time, although the gross indices show higher volatility, particularly at times of high inflation, either positive or negative (Figure 7). For the net output PPI, the annual growth was 0.4% in February 2020, down from 1.0% in January 2020. For the gross output excluding duty PPI, the annual growth in February 2020 was 0.6%, down from 1.5% in January 2020.

Figure 8 shows the net and gross input PPIs over the past 10 years. The trends of the PPIs are similar, although the net input PPI appears more volatile than the gross input PPI. In February 2020, the net input PPI was 116.2 while the gross input PPI was 115.2.

Figure 9 also shows that the annual growth rates for the net input PPI are more volatile than for the gross input PPI. For the net input PPI, the annual growth was negative 0.5% in February 2020, down from 1.6% in January 2020. For the gross input PPI, the annual growth in February 2020 was negative 0.5%, down from 0.3% in January 2020.

In addition to the data included in this statistical bulletin, the following detailed datasets are available:

• Aerospace and electronic cost indices time series (MM19)

• Producer price inflation time series (MM22)

Higher, lower and equal movements for each Producer Price Index (PPI) are shown in the Producer price inflation records: monthly figures.

A summary of the revisions to PPI data are available in the producer price inflation revision triangles:

• Producer price inflation revision triangle: total output 12-months (JVZ7)

• Producer price inflation revision triangle: total output 1-month (JVZ7)

• Producer price inflation revision triangle: total input 12-months (K646)

• Producer price inflation revision triangle: total input 1-month (K646)

Other important measures of inflation and prices include the Consumer Prices Index (CPI) and the Services Producer Price Index (SPPI).

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Producer price indices QMI.

If you would like more information about the reliability of the data, a Producer Price Index (PPI) standard errors article was published on 18 May 2018. The tables present the calculated standard errors of the PPI between January 2017 and December 2017, for both month-on-month and 12-month growth.

Guidance on using indices in Indexation Clauses (PDF, 197KB) covers producer prices, services producer prices and consumer prices.

An up-to-date manual for the PPIs, including the import and export index, is available. PPIs methods and guidance (PDF, 1.14MB) provides an outline of the methods used to produce the PPIs as well as information about recent PPI developments.

Gross sector basis figures, which include intra-industry sales and purchases, are shown in the producer price inflation dataset Tables 4 and 6.

The detailed input indices of prices of materials and fuels purchased by industry (producer price inflation dataset Table 6) do not include the Climate Change Levy (CCL). This is because each industry can, in practice, pay its own rate for the various forms of energy, depending on the various negotiated discounts and exemptions that apply.

Coronavirus (COVID-19)

During the coronavirus (COVID-19) outbreak, we are working to ensure that we continue to publish PPI and SPPI. The price collection for this month’s publication has been largely unaffected. As this situation evolves we are developing several solutions to meet potential scenarios depending on the amount of data that is able to be collected both through our in-house surveys and by our external data suppliers to ensure we are still able to produce the publications over the coming months. These include considering incorporating fewer data into the indices, using the previous month’s movements to construct the latest estimates and reducing the level of detail published. Users will be informed of any changes to how the data are measured.

The ONS has released a public statement on COVID-19 and the production of statistics. Specific queries must be directed to the Media Relations Office.

After EU withdrawal

As the UK leaves the EU, it is important that our statistics continue to be of high quality and are internationally comparable. During the transition period, those UK statistics that align with EU practice and rules will continue to do so in the same way as before 31 January 2020.

After the transition period, we will continue to produce our inflation statistics in line with the UK Statistics Authority’s Code of Practice for Statistics and in accordance with internationally agreed statistical guidance and standards.